Substitutes could hit demand for copper

Print this page Posted on : 08-31-2007 by recycleinme.com

Global copper prices have retreated from last year’s records, but a greater use of substitutes for the metal still could hit demand, industry participants say.

So far, around 2 per cent of copper demand has been lost to alternatives. But in the worst case scenario, some analysts forecast that between 5-10 per cent could be lost by the decade’s end as sustained high prices speed substitution into more complex products, and the effects knock on to developing economies such as China.

MARKET’S FEAR

“What markets really fear is (a move) out of copper and into aluminium,” said Calyon analyst Mr. Michael Widmer.

“It’s particularly bad because it isn’t ad hoc-once you’ve redesigned the product it’s unlikely that you’ll get back into reusing copper,” he said.

If copper prices stay high, the impact of substitution on the market could grow “alarmingly,” said analyst Mr. Jon Barnes, principal consultant on Copper fabrication at metals consultancy CRU.

A study by CRU for the International Copper Association showed a five-fold increase in demand destruction from 2004 to 2006, albeit in small tonnage terms.

The trend may seem negligible against a backdrop of China’s rapid industrialisation.

China is the world’s biggest consumer of copper, accounting for around 65 per cent of the growth in the metal’s consumption since 2000. However, nickel’s spectacular blowout this year shows what can happen when the tide turns.

NICKEL’S SLUMP

Nickel prices had more than doubled on the London Metal Exchange over the last year until May. Then manufacturers in China switched to low nickel-bearing pig iron. The metal plummeted from above $50,000 / tonne to half that in three months as producers, then speculators, filed out.

If a similar situation were seen with copper, the heady price gains of recent years could be erased.

Copper prices have spiked some 400 per cent since 2003 on the commodities boom, driven by demand from China.

In simple products such as pipes for the plumbing industry, substitution mainly involves a straight switch to other, cheaper materials.

Plumbers are switching to PVC tube instead of copper, leading to a 20 per cent fall in demand from the sector globally, according to estimates by CRU. Plumbing now accounts for about 5 per cent of worldwide copper demand.

USE OF PLASTICS

Mr. Dave Cosgrove technical services manger at Pimlico Plumbers in London, said “through the roof’ copper prices triggered the use of plastics in 20 per cent of his piping.

“The plastic is becoming more attractive since the introduction of the higher copper prices….that really is a massive factor,” he said.

Roofing strip and cable are likely to be the next areas where substitution becomes an issue, analysts say.

And ad new suburbs spring up near Shanghai and Tallinn demand for simply fabricated copper products in roofing, and plumbing and telecoms may fall back.

“Today, 30 per cent of the formerly existing (global) demand is already gone and a futher sharp reduction is ongoing,” said Mr. Christoph Geyer, of General Manger of KME Germany, part of KME Group SpA, earlier this eyar. KME is one of the world’s largest manufacturers of copper and copper alloy products.

Not withstanding the enormous potential in Eastern Europe and China only partly into account, “a total loss of potential demand by 50 per cent is a valid estimation for the next two years to come” he said.

Independent consultant Mr. Simon Hunt said plastics will replace copper in as much as 75 per cent of plumbing sector by the end of the decade. Leading markers of wire and cable believe that some 1 million tons of demand for copper will be lost by 2010, he said.

ESTIMATES

Estimates for the market for refined copper in 2010 average around 20.5 million tons, compared with 18.3 million in 2007.

When it comes to more complex products, substitution is less straight forward. In tandem with customers, fabricators are easing price costs through innovation, which has led to a trend of thinning and miniturising products, and exploring copper-based alloys were applicable.

Ms Sallie-Ann Eaton of UK copper-based alloy producer and fabricator B. Mason & Sons Ltd said the company had been trying to help its customers alleviate the impact of high prices, in part to dampen demand destruction.

“We ask, are they using the right metal? Are they being as effectively as they possibly can be in their production process?” Ms. Eaton said. “Customers are looking at using much thinner material.”

Value for money has also helped direct research budgets elsewhere, with growing interest in the applications of copper’s cheaper cousin, aluminium.

Makers of air-conditioning sector have been specifying small-diameter tubes with thinner walls, to cut copper content and reduce costs.

In China, trials are being conducted using aluminium for external tubes, with around 1 million units being tested, said Mr. Hunt.

CU-AL TUBES

Chinese company Changzhou Xingrong has developed a copper-aluminium tube instead of a straight copper tube for the heat exchanger part of the air condition unit, Hunt said. These tubes cut the copper content by 80 per cent, so “if successful, these cu-al tubes will change the face of the industry,” he said. He estimates that substitution could cut out as much as 2 million tonnes of a market for refined copper that could be 20.5 million tonnes by 2010. Estimates by analyst Mr. Jon Bergtheil of JP Morgan Securities are lower, topping out at 1 million tonnes.

The same process is occurring in parts of Europe.

“Prices remaining high are an issue related to us and also customers,” said Mr. John Peter Leesi, president and CEO of Finnish-UK copper fabricator Luvata.

The process of exploring value-added products for customers highlights the need to “develop solutions outside copper,” he said, such as using aluminium heat exchanges for certain applications.

Industry participants say it’s hard to predict how effective these efforts will be at restraining demand destruction for copper.

HARD TO STOP?

But wile the move to alternative products can take years as products are tested, personnel retrained and specifications reset, once the substitution juggernaut starts to roll, it may be hard to stop, they say.

“If consensus is for prices to ease in the short term, the market is more likely to grin and bear any price spikes,” said Mr. Simon Payton of the International Wrought Copper Council.

“But if everybody thinks that the copper price will stay high for a long time, then businesses start thinking about how they can reduce costs,” he said.

Goldman Sachs JBwere and City group expect prices to hold above $6,000 / metric tonne for the next few years.

Source : Business Line